Capital reductions;

Page 1

2 H A S K I N S & S E L LS January
THE liberality which characterizes the
corporation laws of some states tends
to a frame of mind which dismisses from
serious consideration reported actions of
corporations organized under the laws of
those states. One reads in the newspapers
of certain actions taken by a corporation
existing under authority of the laws of a
certain state, and passes along to other
news items with the thought that anything
approved by formal vote of directors, is
possible under such laws. The action need
not be rational. It may be unsound econ­omically.
The effect may be a suppression
of the facts. But if expediency so dictates,
and the action is taken properly, the action
has the stamp of legality. Such is likely to
be the mental attitude of one who is
familiar with these matters.
In fairness to such laws, it is interesting
to consider, without prejudice, the pro­posed
action of a certain holding company
as reported in the news column. Is the
action facilitated by the laws governing
the organization and corporate conduct of
the company in question? Is there any­thing
questionable about the proposed ac­tion?
Does it gain any improper advan­tage
on account of the character of its
shares of capital stock and the laws author­izing
the issuance of such shares?
"The Blank Corporation has called a
special meeting of class B stockholders for
November 28 to vote on a proposal to re­duce
the stated value of the class B stock
from 365,849,369.00 to 346,842,721.00,
thereby creating capital and capital surplus
and applying a portion of the capital and
surplus to write investments down to
market value.
"The purpose of the proposal is to reduce
the paid-in capital of the class B stock
from 310.00 to 35.00 and bring about a
capital readjustment and thereby correct
the existing situation under which the pay­ment
of dividends may be interrupted,
while the corporation is receiving income
from investments sufficient to cover divi­dend
requirements."
The foregoing quotations, slightly dis­guised,
are as reported by the press from
the company's announcement. The dis­cussion
which follows is based on the news­paper
statement.
Analyzing the announcement, it is ap­parent
that the company issued some of its
stock for, or purchased from the proceeds
thereof, certain securities, at prices, which,
on the basis of the market (October 31,
1930) would have to be reduced substan­tially.
This would result in a material re­duction
of the balance sheet value of the
securities owned. The paper loss incident
to such devaluation presumably would be
large. It would be too large to permit of
absorption by the surplus accounts, the
character of which is not disclosed. The
corporation may have had earned surplus,
or surplus arising from valuation of se­curities,
or paid-in surplus resulting from
arbitrary classification of paid-in capital.
At any rate, whether from motives of ne­cessity,
or of expediency, there was not suf­ficient
surplus to absorb the write down.
And so, it is proposed that stated capital
shall be adjusted, so reducing it as to make
Capital Reductions